Gold Isn't Money, Yet

The recent move up in the price of gold has strengthened the hand of the camp of gold bugs. But this is a tiny camp. Among professional economists, support of a gold coin standard is limited mainly to members of the Austrian School, which has been a tiny minority in the profession. There are a few supply-side economists who call for a government-run monetary system comprised mostly of credit money, which in turn is created by a government-licensed monopoly, the commercial banking system. Behind this monopoly stands another government-licensed monopoly, the central bank. The number of academic economists who believe that there should be laws against fractional reserve banking — that banks should not be allowed to loan out money long term that has been deposited short term, with a guarantee that the depositor can withdraw his money at any time — is probably under fifty, and may be under a dozen.

What economists think is a marginal issue. The crucial issue to the operation of any monetary system is what participants in the market decide to use as money. Here, the issue today is clear: the public does not use gold coins as money. Gold coins in the United States were removed from circulation by executive order in 1933. In Europe, the banks’ suspension of redeemability in gold coins took place within weeks of the outbreak of World War I in the summer of 1914. England restored redeemability in 1925, but a public run on the Bank of England’s gold forced the Bank to suspend payment in 1931.

With the universal suspension of gold coin redeemability by citizens by 1933, the public was forced to accept the theft of their deposits. They were taught by every media outlet including the universities that gold was a barbarous relic, in the words of that self-taught economist, the mathematician (B.A. degree), John Maynard Keynes. The world’s bankers applauded. So did the world’s political leaders. Without the threat of a run on the banks’ gold, politicians and bankers could create money at will. They could print up all the money they wanted because the public could not demand gold coins in exchange for their bank deposits and their paper money. The golden handcuffs were thrown away, and they remain discarded.

Austrian School economists are in favor of a gold coin standard because they are in favor of market-created money. They are convinced that gold and silver coins will function as money whenever laws establishing bank monopolies are abolished, when contract law is enforced by the civil government, and when no agency is allowed to issue receipts for precious metals (or anything else) that are not backed 100% by the assets necessary to redeem them. Austrian School economists present the case for gold in terms of real-world decisions by acting individuals on an unhampered free market. They deny that gold has intrinsic value, i.e., value independent of the decisions of acting individuals. They insist that gold has had historic value because of its industrial uses, its applications in jewelry and art, and demand for gold as money — mainly the last factor.


The case for a gold coin standard is the case for individual economic sovereignty. It is a case for a monetary standard that arises without government interference for or against gold as money. This is the case for voluntary contracts.

The modern economy is not a voluntaristic system. The laws reflect the political power of special-interest voting blocs. Commercial banks are among the most powerful of these special interests. The modern monetary system is therefore a rigged system. It always has been, but from the end of the Napoleonic wars in 1815 until the outbreak of World War I in 1914, the international monetary system was the least rigged system since the days of the gold coin standard in the Byzantine Empire, which enjoyed eight centuries of stable money.

The public in the West today is completely unfamiliar with gold as money. Everyone uses paper money or bank credit money: checks and credit cards. Contracts are written in terms of bank credit money. Everyone’s economic plans are based on men’s faith in the long-term sovereignty of governments over money, which means bank credit money. The mark of this faith is the capital markets’ responses to decisions of the Federal Reserve System, which is seen as an appendage of Alan Greenspan. He has the power to move markets up or down merely by controlling the degree of clarity in his public pronouncements.

If we are going to defend intellectually the legitimacy of free market economics and free market institutions, then we must adopt the principle of consumer sovereignty. The primary justification of the free market is that it extends the greatest authority to the individual over his own affairs. It makes individuals responsible for the allocation of whatever they own. It is a system based on the judicial and moral principle of individual legal responsibility.

So, the intellectual defenders of the pure gold coin standard are caught in a bind. They believe that government manipulation of the monetary system is inefficient. This interference with consumer sovereignty over money through contract law must produce a misallocation of money, meaning capital. The present system will produce booms and busts in the capital markets and the consumer markets. Austrian economists stand on the sidelines and yell “stop” every time the central bank interferes with interest rates by increasing or decreasing the supply of “high-powered money” — mainly its holdings of government debt certificates.

The public understands none of this. Neither do most economists and politicians. All they know is that, once adopted, the central bank’s control over money is like holding a tiger by the tail. The central bank can’t let loose safely. Neither can the rest of us. This is why, three decades ago, economist F. A. Hayek wrote a book on monetary policy titled, A Tiger by the Tail: The Keynesian Legacy of Inflation. Two years later, he received the Nobel Prize in economics, but not for this book.

The fact that the public doesn’t understand monetary theory isn’t the bedrock assumption of my theory that the public isn’t interested in gold as money. The public has never understood monetary theory, even in the gold standard era. They knew this much: crooks can counterfeit money. They knew that it is difficult to counterfeit gold and silver coins. So, people voluntarily used gold coins in exchange. They demanded gold coins for large transactions, with silver coins for smaller transactions. What mattered most for monetary policy was the individual’s legal authority to walk into a bank and exchange his banknotes or his deposit certificates issued by the bank and get gold coins. The banks could also do the same thing to the United States Treasury.

Today, the public doesn’t regard gold as money. If we are to make the case for gold as money, we must acknowledge the reality that gold is money today only for central banks. They tag their bars of gold stored mainly in the Federal Reserve Bank of New York. Employees in the vault move these bars back and forth into appropriate piles. This is how central banks clear their accounts with each other. Some central bankers still believe that gold is money, but only for central bankers. They regard gold as money for their closed, monopolistic little world. After all, they stole it fair and square from commercial banks, who stole it fair and square from their depositors. The victims did not complain much in 1914, 1931, and 1933. Possession is nine-tenths of the law, especially when governments not only go along with the existing arrangement, they created it.


The mountain of debt piles up because creditors are convinced that the central banks will not inflate their currency units “too much,” and debtors are convinced that central banks will not allow price deflation. They believe that the existing pile of debt will never be repaid. It cannot be repaid without shrinking the money supply, because the monetary system is based on the monetization of debt, especially government debt, by the central banks. If the government ever paid off their debts, forcing the central banks to sell their debt, the central banks would have to monetize something else as a replacement asset in the monetary base. If the banks don’t monetize debt, then they must monetize equity: stocks, real estate, or (if necessary to prevent monetary deflation) desk chairs.

The world’s existing debt level is assumed to be a floor. It is assumed to be like a ratchet. It moves only in one direction: up. This means that monetary reform is never discussed by economists and reformers except in terms of preserving the existing debt floor. To speak of the repayment of debt in general is to speak of either monetary deflation, price deflation, bankruptcy, and depression (the shrinking of the monetary base back to the level of gold coins) or else the transfer of ownership to central banks (the monetization of equity). We have a tiger by the tail.

This morality of this system was described by David about 3,000 years ago: “The wicked borroweth and payeth not again” (Psalms 36:21a). The results of this monetary policy were described by the prophet Isaiah 250 years later: “Thy silver has become dross, thy wine mixed with water” (Isaiah 1:22).

There is only one a way back to (1) a full gold coin standard without (2) fractional reserve banking that would not be massively deflationary, thereby destroying men’s confidence in the free market. That non-deflationary transition would involve the central banks’ raising the price of gold while simultaneously selling off its debt. The currency-denominated value of the nation’s monetary base would remain the same.

Then, to get the gold into the hands of the public, the central banks would either have to auction off their gold in the form of coins (not bullion) or else simply mail the same number and quantity of gold coins to individual voters or taxpayers. I think the latter strategy would be the most politically acceptable. I just don’t think there is any constituency for it. If one appeared, governments would fight it, and academic economists would back the government.

The main problem with a central-bank hike in the price of gold is this: it would create massive windfall profits for gold investors. This is politically unacceptable. If you think getting a flat tax substituted for the graduated income tax is a hard sell politically, think of what a pro-gold coin standard political movement would face, and how few people would understand the issues.

There is no conceivable way to establish a full gold coin standard that doesn’t involve either massive deflation or else a huge hike in the price of gold as the price of de-monetizing debt. A rise in the price of gold that did not also mandate the return to the public of all of the stolen gold would validate the central banks’ ownership of most of the world’s gold, which is the opposite of the traditional free market economist’s case for gold: individual consumer sovereignty.

My conclusions: (1) the level of debt will increase, (2) the central banks’ monetization of debt will increase, and (3) monetary inflation will increase.

If monetary inflation increases, gold will eventually rise in price. This is my case for gold as a commodity investment. Entrepreneurial (“windfall”) profits to gold owners will take place indirectly, through the price effects of monetary inflation, but not directly, i.e., through a coordinated, international decision of the major central banks to de-monetize debt and re-monetize gold by (1) hiking its price and (2) substituting gold coins for debt as the monetary base, nation by nation.

We really do have a tiger by the tail, just as Hayek wrote three decades ago. As investors, we must think through the implications of remaining behind the tiger. A few people may be able to escape safely, but most people cannot do so without confronting the tiger face to face. Everyone can’t sell currency-denominated assets at the top and buy gold or other inflation hedges at the bottom.

I believe this process has already begun.


It is conceivable that individuals will someday return to a full gold coin standard, but only in response to a breakdown in the monetary units of international trade. The cost of such a transition would be horrendous. Hardly anyone knows where to buy gold coins. There are not enough coin stores to handle demand for two or three billion adults to sell debt or equity (to whom?) and buy gold.

There are technical ways to make the transition from credit money to gold money. It is possible to create digital bank accounts in gold, with 100% reserves. It could be computerized. Actually, this has already been done: But making the technology available is very different from persuading billions of individuals, most of whom do not have bank accounts, to make the transition a little at a time.

For as long as the existing monetary system muddles through, most people will stick with it. I cannot imagine a smooth transition to a full gold coin standard, or even a 100% reserve gold digital standard. This doesn’t mean that it cannot be done. It means that I cannot imagine how, and that I have not seen any written case for how this smooth transition could be accomplished. It took World War I and the Great Depression to get voters to accept the legality of the theft of their gold by commercial banks and then by central banks. What will it take to reverse the theft and return gold to the general public as a way to jump-start a gold standard and a banking system without fractional reserves?

If this transition comes, it is more likely to come in Asia, where the legacy of precious metals coins is stronger, and where the division of labor has not advanced to Western levels — although it is advancing very fast. The problem is, Asian monetary systems are also credit-based, central bank-operated. They are all rigged currencies. As 2.5 billion people in India and China jog into middle-class living over the next two decades, the coin of the two realms will be mostly digital, credit-based, and therefore debt-based. Only if there are secondary markets among the masses that remain based on precious metals will the transition be easier.


The recent upward move of gold’s dollar-denominated price has to do with gold’s status as a well-known inflation hedge and war hedge. We are experiencing nothing like “a return to gold.” The public remains unfamiliar with gold coins, and this is not likely to change, short of an international economic catastrophe.

We who are defenders of the free market must do what we can to educate people, especially ourselves, to understand the case for freedom and individual responsibility. This involves understanding the case for voluntary contracts. As part of this educational effort, we should make the case for honest money, which is the case against fractional reserve banking. But this task has barely begun, and the rise in debt is now becoming exponential. There will be a series of debt crises long before voters force the politicians to return to a full gold coin standard. That return would involve a return to freedom. For this, there is a small constituency, even among self-identified gold bugs.

December 30, 2002

Gary North is the author of Mises on Money. Visit For a free subscription to Gary North’s twice-weekly economics newsletter, click here.

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